Share Code: ARH – Market Cap: R0.9bn – PE: 5.9x – DY: 6.3%

H1:20 – Great cost-control despite headwinds

• While ARB missed out topline expectations, management’s extraction of efficiencies across the Group saw a resilient profit performance.
• The disappointments were all in sales, as Eskom/contractor volumes remained weak in the Electrical Division and retailer/consumer markets stagnated.
• The victories were all won in costs as the Radiant acquisition begins to bed-down, an underperforming Electrical store was closed and the Lord’s View DC began operations.
• Slight “pre-Chinese New Year” overstocking across the Group negatively impacted on cash flows but should serve the Group well given the current Covid-19 (i.e. “Coronavirus”) disruption to global supply chains and the coming likely stock shortages across global and domestic markets.

Our Thoughts: H2 to remain tough, but long-term positive

• The Group remains ungeared, has positive cost-savings that should annualize nicely going forward and is well-positioned to weather the current macro-headwinds and capture any growth that may appear going forward.
• Unfortunately, H2 in South Africa and with growing global risks is likely to remain a tight trading environment and one with a lot of forecast risk (either upside or downside).

Forecast, Valuation & Implied Return: Still underrated

• Our fair value for ARH is 562cps (previously: 576cps) on an implied Price Earnings (PE) of 8.3x, indicating that the stock is c.39% undervalued at its current share price.
• Rolling our fair value forward at our CoE, we arrive at a 12m TP of 659cps (previous 12m TP: 670cps) on an Exit PE of 13.2x.
• Key risks to the Group are unchanged from our Initiation of Coverage.